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Arbitrage: Bunge/Corn Products



June 23, 2008 – Comments (0) | RELATED TICKERS: INGR , BG

I'm trying to figure out how to play this one.  As most of you have heard, food conglomerate Bunge Ltd (BG) offered $4.48B to buy out Corn Products Int'l (CPO), which translates to about $56/share.  Although CPO started the day up at almost $55, it has given up about 5 dollars, trading at exactly $50 at the time of this writing (2.20pm), though still up 17% since Friday's close.  Meanwhile, Bunge has fallen over 10%, although it actually started in the green at the beginning of the day.  The merger is slated to be consumated in 4Q08 where CPO shareholders would acquire $56 worth of BG stock at the end of the day, thereby gaining approximately 20% of the ownership of BG.

It's one of those situations I think where one company (CPO) gives you about 10% upside if the deal goes through, but the other (BG) could take back the 10% it lost today if the deal gets killed (either by regulators or shareholders).  BG shareholders don't seem enthralled by the dilution idea, given the massive volume selloffs throughout the day.  Here's a couple of speculative questions I have on either side:

For CPO, would there be any antitrust concerns here?  I'm not fully caught up on the agriculture industry, and don't know how expansive BG's operations are, but I can't help but think that DOJ guys will be slinging Sherman/Clayton around.  Is this purely a vertical merger (i.e., is CPO merely a supplier of corn to BG)?  Would CPO shareholders want to hold out for more?  (Today's early CPO buyers @ $55/share must've thought so).  And would S&P be able to recover over 10% from now 'til 4Q06? 

For BG, is the dilution/ negative reaction associated with this merger fully or mostly priced in with the 10% drop? Would I basically be riding BG free of any more loss due solely to the merger going through?  If that's the case, BG would make a compelling buy considering the reasonable chance that its own shareholders would nix the deal.  And wouldn't that make buying BG on top of CPO a nice hedge against the deal falling through?

If you have any thought on those issues, or can think of other substantial ones that I should be mulling over, please share!

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